May 28, 2017

The Rich Are Getting More Mortgages, the Poor Are Getting More Car Loans

Despite the talk of millennials and urbanites abandoning cars for Uber, Lyft and car sharing alternatives, car ownership in the US is rising on an absolute basis.
People want to own things and cars are what they can afford, even if declining used car prices suggest they are a terrible investment. This may be a transitional economic phase as consumer behavior attempts to catch up to new realities, but someone is going to stuck with a lot of hardware worth less than its purchase price and that is going to affect their capacity to buy other things - like new smartphones. JL

Henry Grabar reports in Slate:

Americans have a different relationship to their largest
assets than they did 10 years ago. Homeownership is at its lowest level
in 50 years. Car ownership has crept up toward its all time high in 2006, despite all the talk about shared mobility and
the stereotypical preferences of millennials. 60% of new home loans go to borrowers with super-high credit
scores, a record and double what the
share was then. The same rigorous standards don’t apply to auto lending,

On Wednesday, the New York Fed confirmed that Americans had finally reached a symbolic marker of recovery from the Great Recession: a new record for household debt.

Americans personally owed $12.73 trillion at the end of March, an amount that finally surpasses the $12.68 trillion we owed in September of 2008, before the economy tanked. It’s basically an arbitrary milestone, since the number isn’t adjusted for inflation, and doesn’t account for how much bigger the U.S. economy is now—as a percent of GDP, household debt isn't even close to where it was nine years ago.

We owe money for different stuff now. Student loans now make up 11 percent of household debt, up from 5 percent in 2008, which is one reason student loans became a campaign issue in 2016, and a reason that everyone and their mother is reading my colleague Jordan Weissmann’s post about student loan forgiveness. Something else is also happening with auto loan debt, which is up to 9 percent of U.S. household debt from 6 percent in 2009. For much of the 2000s, auto loans and home mortgages rose in sync, suggesting either that houses and cars are complementary purchases that get made together, or that at least houses and cars responded to the same underlying economic trends. But that link came unstuck five or six years ago, and auto loans haven’t looked back. There are far 107 million loan accounts for car purchases, far more than for home purchases.

It’s probably not that Americans would rather own cars than homes, but that it’s just so much easier to borrow money to buy a car. Why is that? Partly because expensive debt goes where it can, and has flowed into the auto loan business (ridden with complex, exploitative contracts) from the more tightly regulated mortgage industry. Furthermore, housing prices have recovered from the crisis, which means buyers need big loans and good credit to get them. More than 60 percent of new home loans go to borrowers with super-high credit scores, a record since record-keeping began in 2003 and double what the share was then.

You can see that the same rigorous standards don’t apply to auto lending, where the credit score of the median borrower was 706—versus 764 for the median homebuyer.

The takeaway is that this is a country where Americans have an entirely different relationship to their largest assets than they did 10 years ago. Homeownership is at its lowest level in 50 years. Car ownership has crept back up toward its all-time high, which we reached in 2006, despite all the talk about shared mobility and the stereotypical preferences of millennials.

There’s a big price difference between cars and houses, of course: While auto debt per circulating car has gone up 44 percent since 2009 to $8,200, it’s a pittance compared to mortgage debt. Still, it’s not great that so many Americans owe so much money on cars. Used cars have nose-dived in value since last summer. In March, J.D. Power’s Used Vehicle Price Index fell to its lowest level since 2010.

The depreciating, underwater asset of the day, in short, isn’t the McMansion anymore—it's the Ford F-150.

Save And Share :

0
comments:

Post a Comment

As a Partner and Co-Founder of Predictiv and PredictivAsia, Jon specializes in management performance and organizational effectiveness for both domestic and international clients. He is an editor and author whose works include Invisible Advantage: How Intangilbles are Driving Business Performance.Learn more...